Debt negotiations (settlements) versus debt management; how to choose

Most of us are overloaded with debt at one time or another. Whether its car and house payments, student loans or too much credit card debt, we're always searching for a better way to get out of debt. Choosing a debt reduction plan is really important and requires a strategic plan.  Simple budgeting isn't always enough, especially when you're faced with a large amount of debt.

Types of debt that are often troublesome;

  • medical bills
  • student loans
  • credit card debt
  • collection accounts

What is Debt Settlement

Debt settlement also referred to as debt negotiations is a method to settle your debts for less than what you owe. Debt settlement procedures can be very effective IF you know what you are doing and have some money.

When you want to avoid bankruptcy and get out of debt AND you have some money set aside, you can negotiate with your creditors or use a debt negotiator to do it for you. Often they will offer 30-40% of the total debt to be considered as settled in full. This can cut the debt in half and consider it case closed. That means no more worrying about the creditors coming after you or worrying day and night about being sued or slapped with a judgment.

You must have money to settle your debts, otherwise there is no "debt settlement".  Many times the creditors will accept this, especially if you are in dire straights and they fear you may file for bankruptcy and they'd be left with nothing. Negotiating your own debts without paying a professional. That can mean even more money in your pocket.

What is Debt Management

Debt Management is an entirely different program than debt negotiations. Credit counseling or debt management is used to cut your monthly payments to your creditors but you still pay the full balance. It's a good alternative if you are unable to meet your monthly obligations to your creditors and are falling behind.

A debt counselor can set up a program with your existing creditors and in essence "freeze collections" and reduce your monthly payment. This gives you adequate time to repay everyone without the worry of the accounts going into collections or being sued.

A good debt management program will be a not for profit who will work as your counselor and do all the dirty work with the creditor. You simply pay one payment to the credit counseling firm each month and they disburse your payments for you to your creditors. 

You can even get many creditors to agree to freeze the interest or remove late fees. Often they will also "suspend" credit reporting while you complete the program.

So Which is Best for You?

That depends on whether you have money set aside or not. If you can barely meet your monthly living expenses then there is little room to negotiate settlements. For a creditor to accept a settlement or reduced payoff, you'll need some bargaining power. Debt management would be ideal in this situation to get the creditors off your back while you dig out of debt. If all else fails, bankruptcy is an option to wipe away unsecured debts or re-organize secured ones.